Credit Scores

Before deciding on what terms they will offer you a loan (which they base on their risk), lenders want to discover two things about you: whether you can repay the loan, and if you are willing to pay it back. To assess your ability to pay back the loan, lenders assess your debt-to-income ratio. In order to calculate your willingness to repay the mortgage loan, they look at your credit score.

The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written more about FICO here.

Credit scores only assess the information in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when these scores were invented as it is today. Credit scoring was developed to assess willingness to repay the loan without considering other demographic factors.

Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score is calculated wtih positive and negative information in your credit report. Late payments will lower your score, but consistently making future payments on time will improve your score.

Your credit report must have at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This payment history ensures that there is sufficient information in your report to assign an accurate score. Some folks don't have a long enough credit history to get a credit score. They should spend a little time building up a credit history before they apply.